Accounting Chapter 6 Flashcards

Questions and Answers

Managers typically monitor inventory very closely to ensure that sufficient units are available for sale and to prevent inventory from becoming ____

outdated

Gerald Corporation purchases inventory FOB shipping point. The shipping costs are?

Treated as a selling expense.

Paid by the supplier.

Included in Gerald's inventory. (correct)

The inventory turnover ratio directly measures?

How many days it takes to collect its sales of inventory sold on account.

The days it takes to sell its average inventory balance.

The times per period the average inventory balance is sold. (correct)

Cost of goods sold divided by average inventory is?

Inventory turnover. Signup and view all the answers

What is the effect of recording a sale of inventory under the perpetual inventory system on the financial statements? (Assume that the sales price is higher than the cost of inventory)

Net income increases Signup and view all the answers

The lower of cost and net realizable value method was developed to?

Avoid reporting inventory at an amount that exceeds the benefits it provides. Signup and view all the answers

Which of the following represent reasons why managers closely monitor inventory levels?

To minimize costs of inventory write-downs due to obsolete inventory. Signup and view all the answers

The _ _ ratio shows the number of times the firm sells its average inventory balance during a reporting period.

inventory, turnover Signup and view all the answers

The formula for inventory turnover is?

Cost of goods sold divided by average inventory. Signup and view all the answers

A major difference between companies that provide services and companies that manufacture or sell goods is that those that manufacture or sell goods must account for:

Inventory Signup and view all the answers

Items held for sale in the normal course of business are referred to as ___

inventory Signup and view all the answers

What is inventory classified as?

a current asset. Signup and view all the answers

Companies that produce the inventory they sell are referred to as:

manufacturers Signup and view all the answers

Which of the following accounts are typically reported in the balance sheet of a manufacturing company?

Finished goods Signup and view all the answers

Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for:

Inventory Signup and view all the answers

Which inventory account includes the cost of components that will become part of the finished product but have not yet been used in production?

Raw materials inventory Signup and view all the answers

The definition of inventory includes which of the following items?

Items held for resale Signup and view all the answers

Where is inventory reported in the financial statements?

Balance sheet as a current asset Signup and view all the answers

_____ inventory refers to the products that have been started in production, but are still incomplete.

Work-in-process Signup and view all the answers

What type of company purchases raw materials and makes goods to sell?

Manufacturers Signup and view all the answers

Which inventory account consists of the cost of items for which the manufacturing process is complete?

Finished goods inventory Signup and view all the answers

Which of the following accounts would be found in the balance sheet of a manufacturing company?

Work in process Signup and view all the answers

A multiple-step income statement reports multiple levels of ____

income Signup and view all the answers

_ _ inventory includes the cost of components that will become part of the finished product but have not yet been used in production.

Raw, Materials Signup and view all the answers

Gross Profit is:

Net Sales Revenue minus Cost of Goods Sold. Signup and view all the answers

Items held for sale in the normal course of business are referred to as ___

inventory Signup and view all the answers

On a multiple step income statement, the category of revenues and expenses reported immediately after operating income is referred to as ____ revenues and expenses.

Nonoperating Signup and view all the answers

The Work-in-Process inventory account typically includes which costs?

Indirect manufacturing costs Signup and view all the answers

Which of the following methods are available for costing inventory?

Specific identification Signup and view all the answers

_ _ inventory consists of items for which the manufacturing process is complete.

Finished, Goods Signup and view all the answers

The specific identification method:

Would be beneficial to a company that makes fine jewelry Signup and view all the answers

The type of income statement that reports a series of subtotals such as gross profit, operating income, and income before taxes is a ______ income statement.

Multiple-step Signup and view all the answers

Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods.

Cost of Goods Sold Signup and view all the answers

Net sales revenue minus cost of goods sold is:

Gross profit Signup and view all the answers

Kilian Company's inventory balance at the end of the year does not include $10,000 of inventory that was stored in a separate warehouse and accidentally excluded from the physical count. If the error is not discovered until the following year, the financial statement effect in the current year will be:

Understated assets, retained earnings, and net income Signup and view all the answers

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest ending inventory?

LIFO Signup and view all the answers

Which of the following methods are not used for inventory costing?

NIFO Signup and view all the answers

The inventory costing method that matches each unit of inventory with its actual cost is referred to as the _____ method.

Specific identification Signup and view all the answers

The ____ cost flow assumption more realistically matches the current cost of inventory with current sales revenue.

LIFO Signup and view all the answers

In a LIFO inventory system, inventory costs shown in the balance sheet may be distorted because they may represent costs

Incurred several years earlier Signup and view all the answers

The ___ inventory cost flow assumption typically approximates the actual physical flow of inventory items of most companies.

FIFO Signup and view all the answers

Kilian Company's inventory balance at the end of the current year does not include $10,000 of inventory that was stored in a separate warehouse and accidentally excluded from the physical count. If the error is not discovered, the effect of this error on financial statements in the following year will be:

Overstated assets, retained earnings and net income Signup and view all the answers

Generally, if a company wants its inventory cost flows to be the same as the inventory's physical flows, what inventory method would it use?

FIFO Signup and view all the answers

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest pretax income?

LIFO Signup and view all the answers

In times of rising prices, cost of goods sold determined using the LIFO inventory assumption typically will be ____ than cost of goods sold determined using the FIFO inventory assumption.

More Signup and view all the answers

When prices increase, the ___ inventory method provides the best matching of revenue and expenses.

LIFO Signup and view all the answers

Which inventory cost flow method most realistically matches the current cost of inventory with the current revenue it produces?

LIFO Signup and view all the answers

When prices increase, the ___ inventory method tends to decrease a company's tax liability during a particular fiscal period.

LIFO Signup and view all the answers

Which inventory cost flow method approximates the physical flow of inventory items?

FIFO Signup and view all the answers

The difference between LIFO and FIFO disclosed in the notes to the financial statements of a company currently utilizing the LIFO cost flow assumption is sometimes referred to as the LIFO ___

reserve Signup and view all the answers

Which inventory costing method assumes that the inventory's costs flow out in the same order the goods are received?

FIFO Signup and view all the answers

A periodic inventory system measures cost of goods sold by:

Counting inventory at the end of the period Signup and view all the answers

In times of rising prices, ending inventory determined using the LIFO inventory assumption will be ___ than ending inventory determined using the FIFO inventory assumption.

Less Signup and view all the answers

Margot Inc., which uses the perpetual inventory system, purchases 500 units of inventory to be held for resale. Margot should debit the purchase to:

Inventory Signup and view all the answers

Meller purchases inventory on account. As a results, Meller's:

Assets will increase Signup and view all the answers

When prices rise, which inventory method tends to result in lower income and a lower tax liability?

LIFO Signup and view all the answers

Using the perpetual inventory system, what is the effect of a sale of inventory on assets?

Assets decrease by the cost of the inventory Signup and view all the answers

The cumulative difference between reporting inventory at LIFO rather than FIFO is commonly referred to as the:

LIFO reserve Signup and view all the answers

Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to:

Decrease an asset and increase an expense Signup and view all the answers

Josh Corporation uses the perpetual inventory system. Josh sells goods to a customer on account for $2,000. The cost of goods sold is $1,500. What is the entry required to record the expense of the inventory sold?

Debit Cost of Goods Sold $1,500; credit Inventory $1,500 Signup and view all the answers

Clover Corporation uses the perpetual inventory system. When Clover purchases inventory on account, the entry will include which of the following?

Debit Inventory Signup and view all the answers

Under the ____ inventory system, the inventory account reflects purchases during the year, as well as cost of units sold.

perpetual Signup and view all the answers

Purchasing inventory on account:

Increases assets Signup and view all the answers

The LIFO adjustment is used internally to convert the inventory:

to the LIFO basis. Signup and view all the answers

What is the effect of recording a sale of inventory under the perpetual inventory system on the financial statements?

Net income increases Signup and view all the answers

In a perpetual inventory system, when a company sells inventory on account, how many entries are required?

Two Signup and view all the answers

For internal record keeping, most companies carry their inventory using the _____ basis.

FIFO Signup and view all the answers

Clark uses the perpetual inventory system. Clark sells goods to a customer on account for $1,000. The cost of the goods sold was $700. Which of the following entries are required?

Debit Cost of Goods Sold $700; credit Inventory $700 Signup and view all the answers

The shipping term FOB stands for:

Free on board Signup and view all the answers

Which of the following items are readily available from an inventory account under the perpetual inventory system?

Beginning inventory balance Signup and view all the answers

Ronald Corporation purchases inventory with terms FOB destination. The shipping costs are $300. The shipping costs are:

Paid by the supplier Signup and view all the answers

Vogel Company maintains its inventory records using the FIFO assumption, but reports its inventory consistent with LIFO. At the end of the year, Vogel converts its inventory balance from FIFO to LIFO by using the:

LIFO adjustment Signup and view all the answers

Freight-in is recorded as part of , whereas freight out is often recorded as .

Inventory; selling expense Signup and view all the answers

Using the perpetual inventory system, what is the effect of a sale of inventory on assets?

Assets decrease by the cost of the inventory Signup and view all the answers

Which inventory cost flow assumption is commonly used internally by companies that externally report under the LIFO cost flow assumption?

FIFO Signup and view all the answers

The method of valuing inventory was developed to avoid reporting inventory at an amount that is than the benefits it can provide.

lower of cost and net realizable value; greater Signup and view all the answers

FOB destination means title to the goods passes:

when they are shipped to the customer. Signup and view all the answers

Study Notes

Inventory Basics

Inventory consists of items held for resale or sale in the normal course of business.
Classified as a current asset on the balance sheet.
Companies producing their own inventory are known as manufacturers.
Key inventory types include: Work in process, Finished goods, Raw materials.

Financial Statements and Inventory

Inventory is reported as a current asset on the balance sheet.
Cost of goods sold (COGS) must be accounted for by manufacturers and retailers.
Multiple-step income statements present various levels of income, including gross profit.

Inventory Classifications

Raw materials inventory includes materials not yet used in production.
Work-in-process inventory represents items started in production but incomplete.
Finished goods inventory consists of completed products ready for sale.

Accounting Methods

Specific identification method matches each unit of inventory with its actual cost, ideal for high-value items.
FIFO (First In, First Out) and LIFO (Last In, First Out) are common inventory cost flow assumptions.
In times of rising prices, LIFO generally results in lower reported incomes and less tax liability.

Errors and Their Effects

Omissions in inventory counts (e.g., missing $10,000 inventory) can lead to understated assets and net income in the current year, but overstated net income in the following year.

Inventory Turnover

The inventory turnover ratio measures how often inventory is sold or used in a period.
Calculated as cost of goods sold divided by average inventory, reflecting how efficiently inventory is managed.

Sales Transactions

Under perpetual inventory systems, when inventory is sold, two entries are required: one for sales revenue and one for cost of goods sold.
Sales result in assets increasing by the sales price while reducing assets by the cost of the inventory.

Shipping and Ownership

FOB (Free On Board) shipping point indicates that buyer takes ownership at shipping; FOB destination means ownership transfers upon arrival.
Freight-in is added to inventory costs, while freight-out is recorded as a selling expense.

Cost Flow Methods

LIFO can distort the balance sheet due to historical costs not reflecting current market conditions.
FIFO typically aligns with the actual physical flow of inventory.
Management uses FIFO for internal records even when using LIFO for external reporting.

Additional Concepts

The LIFO reserve reflects the difference between LIFO and FIFO costing methods.
Lower of cost and net realizable value method prevents overstating inventory values exceeding potential benefits.
Companies monitor inventory closely to avoid outdated stock.

Accounting Entries and Effects

Purchases on account increase both assets and liabilities.
Accurate recording of sales impacts net income positively as revenues increase and expenses account for COGS.
All transactions should reflect appropriately in the financial statements to ensure accurate reporting.### Inventory Management
Managers monitor inventory levels primarily to ensure sufficient units are available for sales.
Reducing costs associated with inventory write-downs due to obsolescence is a key reason for stringent inventory oversight.
Increasing the average days in inventory is typically not a goal of effective inventory management.

Inventory Turnover Ratio

The inventory turnover ratio reflects how many times a firm sells its average inventory within a specific reporting period.
A higher turnover ratio indicates efficient inventory management and strong sales performance.

Inventory Turnover Formula

The formula for calculating inventory turnover is: cost of goods sold divided by average inventory.
Understanding this formula helps in assessing the efficiency of inventory utilization and overall operational performance.

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Test your knowledge on the key concepts of inventory as covered in Accounting Chapter 6. This flashcard quiz focuses on differentiating between service-based and goods-based companies in terms of accounting practices. Perfect for students preparing for exams or needing to reinforce their understanding of inventory.

Accounting Chapter 6 Flashcards

Questions and Answers

Managers typically monitor inventory very closely to ensure that sufficient units are available for sale and to prevent inventory from becoming ____

Gerald Corporation purchases inventory FOB shipping point. The shipping costs are?

The inventory turnover ratio directly measures?

Cost of goods sold divided by average inventory is?

What is the effect of recording a sale of inventory under the perpetual inventory system on the financial statements? (Assume that the sales price is higher than the cost of inventory)

The lower of cost and net realizable value method was developed to?

Which of the following represent reasons why managers closely monitor inventory levels?

The ___ ___ ratio shows the number of times the firm sells its average inventory balance during a reporting period.

The formula for inventory turnover is?

A major difference between companies that provide services and companies that manufacture or sell goods is that those that manufacture or sell goods must account for:

Items held for sale in the normal course of business are referred to as ___

What is inventory classified as?

Companies that produce the inventory they sell are referred to as:

Which of the following accounts are typically reported in the balance sheet of a manufacturing company?

Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for:

Which inventory account includes the cost of components that will become part of the finished product but have not yet been used in production?

The definition of inventory includes which of the following items?

Where is inventory reported in the financial statements?

_____ inventory refers to the products that have been started in production, but are still incomplete.

What type of company purchases raw materials and makes goods to sell?

Which inventory account consists of the cost of items for which the manufacturing process is complete?

Which of the following accounts would be found in the balance sheet of a manufacturing company?

A multiple-step income statement reports multiple levels of ____

___ ___ inventory includes the cost of components that will become part of the finished product but have not yet been used in production.

Gross Profit is:

Items held for sale in the normal course of business are referred to as ___

On a multiple step income statement, the category of revenues and expenses reported immediately after operating income is referred to as ____ revenues and expenses.

The Work-in-Process inventory account typically includes which costs?

Which of the following methods are available for costing inventory?

___ ___ inventory consists of items for which the manufacturing process is complete.

The specific identification method:

The type of income statement that reports a series of subtotals such as gross profit, operating income, and income before taxes is a ______ income statement.

Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods.

Net sales revenue minus cost of goods sold is:

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest ending inventory?

Which of the following methods are not used for inventory costing?

The inventory costing method that matches each unit of inventory with its actual cost is referred to as the _____ method.

The ____ cost flow assumption more realistically matches the current cost of inventory with current sales revenue.

In a LIFO inventory system, inventory costs shown in the balance sheet may be distorted because they may represent costs

The ___ inventory cost flow assumption typically approximates the actual physical flow of inventory items of most companies.

Generally, if a company wants its inventory cost flows to be the same as the inventory's physical flows, what inventory method would it use?

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest pretax income?

In times of rising prices, cost of goods sold determined using the LIFO inventory assumption typically will be ____ than cost of goods sold determined using the FIFO inventory assumption.

When prices increase, the ___ inventory method provides the best matching of revenue and expenses.

Which inventory cost flow method most realistically matches the current cost of inventory with the current revenue it produces?

When prices increase, the ___ inventory method tends to decrease a company's tax liability during a particular fiscal period.

Which inventory cost flow method approximates the physical flow of inventory items?

The difference between LIFO and FIFO disclosed in the notes to the financial statements of a company currently utilizing the LIFO cost flow assumption is sometimes referred to as the LIFO ___

Which inventory costing method assumes that the inventory's costs flow out in the same order the goods are received?

A periodic inventory system measures cost of goods sold by:

In times of rising prices, ending inventory determined using the LIFO inventory assumption will be ___ than ending inventory determined using the FIFO inventory assumption.

Margot Inc., which uses the perpetual inventory system, purchases 500 units of inventory to be held for resale. Margot should debit the purchase to:

Meller purchases inventory on account. As a results, Meller's:

When prices rise, which inventory method tends to result in lower income and a lower tax liability?

Using the perpetual inventory system, what is the effect of a sale of inventory on assets?

The cumulative difference between reporting inventory at LIFO rather than FIFO is commonly referred to as the:

Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to:

Josh Corporation uses the perpetual inventory system. Josh sells goods to a customer on account for $2,000. The cost of goods sold is $1,500. What is the entry required to record the expense of the inventory sold?

Clover Corporation uses the perpetual inventory system. When Clover purchases inventory on account, the entry will include which of the following?

Under the ____ inventory system, the inventory account reflects purchases during the year, as well as cost of units sold.

Purchasing inventory on account:

The LIFO adjustment is used internally to convert the inventory:

What is the effect of recording a sale of inventory under the perpetual inventory system on the financial statements?

In a perpetual inventory system, when a company sells inventory on account, how many entries are required?

For internal record keeping, most companies carry their inventory using the _____ basis.

Clark uses the perpetual inventory system. Clark sells goods to a customer on account for $1,000. The cost of the goods sold was $700. Which of the following entries are required?

The shipping term FOB stands for:

Which of the following items are readily available from an inventory account under the perpetual inventory system?

Ronald Corporation purchases inventory with terms FOB destination. The shipping costs are $300. The shipping costs are:

Vogel Company maintains its inventory records using the FIFO assumption, but reports its inventory consistent with LIFO. At the end of the year, Vogel converts its inventory balance from FIFO to LIFO by using the:

Freight-in is recorded as part of ______, whereas freight out is often recorded as ______.

Using the perpetual inventory system, what is the effect of a sale of inventory on assets?

Which inventory cost flow assumption is commonly used internally by companies that externally report under the LIFO cost flow assumption?

The ______ method of valuing inventory was developed to avoid reporting inventory at an amount that is ______ than the benefits it can provide.

FOB destination means title to the goods passes:

Study Notes

Inventory Basics

Financial Statements and Inventory

The _ _ ratio shows the number of times the firm sells its average inventory balance during a reporting period.

_ _ inventory includes the cost of components that will become part of the finished product but have not yet been used in production.

_ _ inventory consists of items for which the manufacturing process is complete.

Freight-in is recorded as part of , whereas freight out is often recorded as .

The method of valuing inventory was developed to avoid reporting inventory at an amount that is than the benefits it can provide.